Fort Walton Beach Council agenda — 08-22-2007 special agenda — reading text

contributions for retirement, Medicare, Social Security, and Workers Compensation, and sick and vacation leave. This statement is generated using the City' s accounting software based on certain payroll data, and distributed by staff to all employees. There are several footnotes that explain what is included in the " other pay," sick leave and retirement categories. Since at least January 2002, the following footnote has been included for retirement: " The 7 Page 29 amount shown as " Retirement" ... represents an amount which the City budgets to the pension plan to keep the fund actuarially sound." An issue has been raised concerning the accuracy of the retirement amounts reflected in the Earning and Benefit Statements. In some years the amount the City budgeted for retirement contributions was greater than the annual required contribution, and in those years the city actually contributed the annual required contribution, not the budgeted amount. In those years, the amount shown as the budgeted amount on the Earning and Benefit Statements was correspondingly greater than the amount the City actually contributed to the retirement fund. Although the footnote accurately states the basis for the retirement amount - the amount the City budgeted for retirement contributions - a question has been raised about the City' s practice of including the budgeted amount in the Earning and Benefit Statements when the amount actually contributed was less. The amount the City contributes to the retirement fund has no bearing on the value of an employee' s pension benefit, as long as the City makes the annual required contribution to the fund. This is due to the fact that the City retirement plan is a defined benefit plan, in which benefits are based on a formula ( years of service x final average earnings x benefit multiplier). Employee pension benefits are based on the benefit formula, not on the amount contributed by the City in any given year. As long as the City makes the annual required contribution as determined by the actuary each year, the value of an employee' s pension benefit will not be affected by the amount actually contributed by the City. Thus, from a legal perspective, the City has met its funding obligations to the retirement plan every year, and is not subject to any liability because the amounts shown on the Earning and Benefit Statements were greater than the amounts actually contributed. Moreover, the footnotes on the statements since at least 2002 have clearly and accurately reflected that the amounts shown for retirement contributions were the budgeted amounts. Everyone would agree that the Earning and Benefit Statements provided to employees should be as accurate as possible. The actuary has recommended that the City move to the " payment delay" model for future actuarial valuations, where the City' s annual required contribution would be determined well before the City budget is adopted. By adopting the " payment delay" model, the City would eliminate many of the issues that have been raised concerning differences between the amount budgeted for retirement contributions and the amount actually contributed. With " payment delay," the amount budgeted would be the same as the annual required contribution, and the budgeted amounts shown on shown on the Earning and Benefit Statements would be more accurate. Comments on Finance Director' s Recommendations The Finance Director has submitted a number of recommendations concerning the City retirement plan. Each recommendation is addressed below. 8 Page 30 Recommendation 1: The roles of the City Council as the Board of Trustees vs. the " GE Pension Plan Advisory Committee" should be re- evaluated. a. There should be increased clarification of responsibilities between City Council, as the Board of Trustees, and the Advisory Committee. b. There should be a clear differentiation between when City Council is taking action as the Board of Trustees or as City Council. c. City Council should appoint the members of the Advisory Committee. d. City Council should consider increasing the independence of the Advisory Committee. Comment: It is apparent that the role of the Advisory Committee has evolved over time. The functions and duties of the Advisory Committee, as set forth in section 17- 11. 3 of the plan, are as follows: a) Fully acquaint itself with full details of the benefit and administrative provisions of the pension fund. b) Serve as liaison between trustees, Plan administrator and members to promote the exchange of information concerning the fund. c) Review all applications for disability benefits and supporting documentation, and render a decision granting or denying the application. d) Perform other functions and duties as directed by the board of trustees. It appears that the Advisory Committee was originally intended to act as a liaison between the Board of Trustees ( City Council) and employees, and make disability determinations. These functions are entirely appropriate for a committee made up of employees. There is nothing in the plan to suggest that the Advisory Committee should be performing investment-related functions. However, it appears that the Advisory Committee has become involved in investment activities. If the City Council determines that the Advisory Committee should continue to perform investment- related functions, there are at least two ways that the committee could be restructured: The composition of the existing committee could be revised to include citizens with expertise in investment matters. A separate investment advisory committee could be created for the sole purpose of overseeing investments and making recommendations on money managers, investment policies, etc. With respect to the Finance Director' s recommendation that the City council appoint the members of the advisory committee, this is a policy decision for the City Council. 9 Page 31 With respect to the Finance Director' s recommendation that the City Council should consider increasing the independence of the Advisory committee, there are fundamental policy considerations that should be reviewed, including: In view of the fact that the City is, by law, ultimately responsible for the pension fund and pension liabilities, is it in the City' s best interest to delegate more authority and independence to the committee? Is the police/ fire model of an independent pension board, which is based on state statutes governing police/ fire pension plans, appropriate for general employee plans? Should the City retain ultimate control over pension decisions and investments of the $ 29 million pension fund? Recommendation 2: The Advisory Committee membership should be changed. e. The Finance Director and HR Director should be removed as voting members the Advisory Committee. f. These members should be replaced with two ( 2) non- employee members who can contribute outside expertise to the Plan. g. Members should be appointed with staggered terms. Comment: There are many ways that the current makeup of the Advisory Committee could be changed. However, the decision on how the committee is composed should be driven by the City Council's decisions on the role and functions of the committee. Once the City Council decides what the committee should be doing, it can decide who should be on the committee, how the members will be selected, and what their terms will be. Recommendation 3: A second- opinion of the actuarial information should be obtained. h. A peer- review that includes an experience study, and a check of the computed contributions and liabilities should be performed. i. A comparison of the GE Plan to other Plans should be performed. j. A policy for periodic independent critique should be established. k. The amortization period used to smooth overpayments or underpayments should be reviewed. Note: A second- opinion of the current Actuarial Valuation has been recommended by the Advisory Committee. Comment: The plan actuary concurs with the recommendations that a second opinion be obtained, and that a policy for periodic independent critique should be established. 10 Page 32 Recommendation 4: City contributions should be fixed and promptly remitted. I. City contributions to the Plan should be set as a percentage of active member payroll. m. The City contribution rate should be set on a long- term basis. A stable contribution rate should be designed to fairly allocate ( accrue) pension costs across several years. n. City contributions should be directed to investment without haste, preferably on a bi- weekly basis ( 26 times per year). o. The Plan should take measures to reduce the volatility of City contributions. p. Changes in the City contribution rate should be recommended by the Advisory Committee and require specific approval by the Board of Trustees. Comment: A "fixed" City contribution rate is contrary to Florida law. Under Florida law, the City is required to fund the retirement plan on a sound actuarial basis. This means that the must annually contribute an amount, calculated by the plan actuary, that is City sufficient to pay the " normal cost" of the plan ( Le., the value of plan benefits which is expected to accrue in the current fiscal year) plus a portion of the unfunded accrued actuarial liability. The City cannot " fix" a contribution rate that is less than the annual required contribution, which varies from year to year. Recommendation 5: The plan should retain professional experts who act in a fiduciary capacity. q. A competitive selection process should be used for all external service providers. r. Cost of services should be reviewed and specifically approved by the Board of Trustees. s. The Plan' s current directed brokerage program should be reviewed. Comment: City currently retains an attorney, actuary, investment advisor and The professional money mangers who act in a fiduciary capacity. The City can utilize a competitive selection process in the engagement or replacement of pension professionals, but this is not required by law. The City' s investment advisor has revised the directed brokerage program that is provided in the City' s current contract with the investment advisor. It is recommended that the current investment advisor agreement be reviewed by counsel. Recommendation 6: Continuing education for the Advisory Committee should be made a priority. 11